Question

Swagelok Enterprises is a manufacturer of miniature fittings and valves. Over a 5-year period, the costs associated with one product line were as follows: first cost of $20,000, and annual costs of $16,000. Annual revenue was $29,000 and the used equipment was salvaged for $10,000. What rate of return did the company make on this product?

Answer 1

Answer:

The rate of return did the company make on this product is 61.93%

Explanation:

initial cost = 20000

Annual benefit = 29000

Annual cost = 16000

Salvage value = 10000

t = 5yrs

Let rate of return is I, then at rate of return NPV=0

Present value = -20000 + (29000 - 16000)*(P/A, i, 5) + 10000 (P/F, i, 5)

-20000 + 13000*(P/A, i, 5) + 10000 (P/F, i, 5) = 0

13*(P/A, i, 5) + 10* (P/F, i, 5) = 20

We need to use trail and error method to find rate of return

At = 10%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 55.49

At = 15%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 48.55

At = 25%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 38.24

At = 35%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 31.09

At = 45%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 25.94

At = 55%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 22.11

At = 60%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 20.55

At = 62%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 19.98

using interpolation

rate of return = 0.6 + (20.55-20)/(20.55-19.98) * (0.62-0.6)

                       = 0.6+0.019298

                       = 0.6193

                       = 61.93%

Therefore, The rate of return did the company make on this product is 61.93%